Westwood Holdings Group, Inc. (NYSE:WHG)
Q1 2016 Results Earnings Conference Call
April 27, 2016, 04:30 PM ET
Sylvia Fry - SVP and Chief Compliance Officer
Brian Casey - President and CEO
Tiffany Kice - CFO
John Fox - Fenimore Asset Management
Mac Sykes - Gabelli & Company
Good day ladies and gentlemen. And welcome to the Westwood Holdings Group First Quarter 2016 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Ms. Sylvia Fry, Senior Vice President, Chief Compliance Officer. Ma'am you may begin.
Thank you. Good afternoon and welcome to our first quarter 2016 conference call. I would like to begin by reading our forward-looking statements disclaimer. The following discussion will include forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties, and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements.
Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today, as well as in our annual report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on forward-looking statements.
In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today.
On our call today, we will have Brian Casey, our President and Chief Executive Officer; and Tiffany Kice, our Chief Financial Officer.
I will now turn the call over to Brian Casey, our CEO.
Thanks Sylvia and good afternoon everyone, thanks for taking the time to join the Westwood Holdings Group's first quarter 2016 earnings call.
Tiffany and I had the opportunity to meet with many of you last month at Investor Relations meetings we held in various locations around the country. And it's great to see you and we truly appreciate you being a shareholder and for your ongoing support of our company.
As you all know, the first quarter of 2016 was defined by extreme volatility with large daily swings and asset prices and a sharp reversal in returns. U.S. equity markets begin the year on an extremely weak note with the S&P 500 posting it's worst start in history with a decline of almost 11%, at the February 11 low.
From this low equities and commodities moved sharply higher over the remainder of the first quarter resulting in most industries registering modestly positive returns for the period.
Central bank policy makers were once again the major catalyst behind the market's recovery. With the European Central Bank, Bank of Japan, and the People's Bank of China providing additional stimulus, while the Federal Reserve did its part by once again delaying any additional rate hikes. As we’ve seen with previous central bank driven rallies, low quality, high data names were the top performer over the second half of the quarter.
The market volatility along with an increase in correlation created a challenging environment for active management in the first quarter. By one industry estimate, only 19% of active LargeCap managers outperformed the S&P 500 during the first quarter.
We were pleased to see that our flagship LargeCap value product within this period was again ahead of both the S&P 500 and the Russell 1000 value industry.
On the other end of market cap range, our mid and SmallCap strategies underperformed in their respective industries. The first quarter of 2016 marked the first full quarter for one of our new equity strategy, U.S. low volatility equity.
The strategy managed by members of our U.S. value and global convertibles team, takes a fundamental approach combining equities and convertibles with the objective of outperforming the Russell 1000 index with lower volatility.
We were encouraged by the return profile on the first quarter with the strategy delivering on its objective during an extreme environment and finishing the quarter over 300 basis points ahead of its index.
In terms of the other strategies managed by the U.S. value team, our multi asset strategy, income opportunity performed well over the quarter delivering a positive return of 1.6%. That was sharply lower volatility than the broader equity market.
Westwood's MLP strategies outperformed on a relative basis with the MLP infrastructure renewal strategy ranking in the top quartile of the peer group despite continued pressure on the MLP asset class.
For all of our strategies, we remain focused on downside protection and we believe our approach to active investment management will continue to serve our clients well as that has over 33 year history.
The market conditions discussed earlier were also a prominent factor for the strategies managed by our global and emerging markets equity team. Similar to the U.S. market, the broad global market seem to find the bottom in early February. With emerging markets leading the subsequent rally, bouncing over 20% from its lows and ending up over 5% for the quarter.
Apart from the ongoing concerns by investors surrounding global growth and lack of inflation, political uncertainty was front and center in non-U.S. market, particularly in Brazil, Germany, and the U.K.
Despite this, Westwood's Global and EM strategies performed well particularly strong performance across all three emerging market strategies of team managers. All three strategies were on the top decile of their respective peer groups for the quarter.
The team continues to focus on executing their long term core investment process, looking for mid-priced companies with a history of creating economic value in both tough times and prosperous times. The team has recently conducted over a 100 research meetings in Latin America, Europe and elsewhere during the first part of the year.
The convertible asset class held us well during the market fell off in the first part of the quarter providing reasonable downside protection versus equity markets. However, the ensuing bounce in risk assets and our underweight and commodity related exposure, resulted in a slight lag to the index.
As we enter the second quarter, we believe convertible valuations present a very attractive entry point for investors. In fact, by certain measures, the asset class is the cheapest it has been since the global financial crisis.
We are actively communicating this to clients and prospects as well as taking advantage of this situation from an investment perspective, particularly in the absolute return focused market and neutral income strategy.
On the distribution side the institutional team enjoyed a strong start for the year with new client mandates and small cap value, income opportunity and our emerging market strategies. As we discussed previously, we’ve been disappointed by our after raising efforts in our small cap value strategy given a strong track record.
We began to see some reward for achieving high consult ratings with wins across corporate and public plans during the first quarter. We also brought on board a new view U.K. based emerging markets client into our UCITS funds during the period, as well as seeing additions by existing clients in our income opportunity strategy.
As we look forward, we see investors at a crossroads from an asset allocation perspective. Many have been disappointed by their allocation with the hedge funds. They are concerned over their fixed income valuations and are looking for where they can source returns to achieve their required rates of return.
Given the significant investment we’ve made in new investment teams and new strategies, we believe we’re well positioned to offer relevant solutions to existing and perspective clients.
The Westwood funds mutual fund family experienced modest net outflows of $71 million during the quarter in much slower phase than the outflows we experienced in the previous two quarters. Over 80% of the redemptions were from our largest fund our income opportunity fund. Despite the fund performing very well and posting positive absolute and peer group relative performance.
We believe a significant level of redemptions was the reaction to investor uncertainty during the stock market downdraft in the early part of the quarter.
Some of the other highlights for the quarter included the LargeCap Value fund seeing an inflow of $40 million from a high network advisory firm with whom we’ve had a long standing relationship and our SMidCap Fund receiving a contribution from an institutional qualified plan client resulting in net flow to that fund of 22 million.
Finally we continue to see interests in our emerging markets mutual fund primarily driven by institutional investment consultants and we’re pleased to be a top performer year-to-date in the Morningstar Universe for Ian Managers.
We remain active in soliciting for new sub advisory partners and working to ensure we’re positioned well with our existing partners in the U.S. and Canada where we sub-advise a series of global and emerging market equity funds for the National Bank of Canada. Our objective there is to be well positioned for attracting new assets when favorable investor settlement returns to emerging markets within the Canadian market.
Total assets of Westwood Trust declined by approximately 1% to $4.9 billion during the first quarter. Net flows were slightly negative for the period primarily because we were able to accommodate the needs of a large client and transfer assets from an account at Westwood Trust, a private wealth platform to a separately managed institutional account at Westwood management.
While this is reflected as the loss in assets for Westwood Trust, the client relationship was maintained by Westwood as an organization. Distributions for tax payments were also higher this year for individuals as gains were realized in taxable portfolios in 2015 as a result of markets being up over 200% since the March 2009 lows.
New business developments slowed from the fourth quarter's pay as market volatility typically slows the pace of money and transition. The best thing we can do in time for volatility is to reach out to our clients to reassure them and help them in any way we can.
We’ve made a significant investment in new system to deliver a better online experience and improve customer's statements. We intend to roll out additional features in the year ahead.
In terms of corporate development we've continued to actively evaluate opportunities to expand our company through the acquisition of private wealth companies in strong geographic markets. We feel that we are an ideal partner for strong and going business. We have a publicly traded stock to incent long term employees. We've scale in our overall business and robust suite of investment strategies to offer clients.
With over two decades of experience serving private wealth clients across multiple markets, we known the business inside now and remain committed to growing this important segment of our business.
To conclude my prepared comments, I’d like to take this opportunity to thank our shareholders again for your support of our various proposals and for your confidence in Westwood. We are unwavering in our focus on delivering the performance our client expect, finding new clients to grow the firm in a measured possible manner and investing in our business for the future.
I'll now turn the call over to Tiffany Kice our CFO.
Thanks Brian and good afternoon everyone.
For the first quarter of 2016, we are reporting total revenues of $29.1 million compared to $29.6 in the same period of 2015. Asset based advisory fees decreased $2.1 million due to lower average assets under management primarily related to asset depreciation while trust fees increased $2.3 million related to revenue generated by Woodway which we acquired on April 1, 2015.
Net income of $3.5 million compared to $5.6 million in the first quarter of 2015 primarily due to the decrease of advisory fees and included one-time implementation cost for information technology improvement of approximately 500,000 net of tax.
Diluted earnings per share was $0.44 compared to $0.71 to the prior year quarter. Economic earnings and non-GAAP metrics decreased to $8.1 million from $9.4 million in the first quarter of 2015. In turn economic earnings per share fell to $1.1 in the first quarter of 2016 compared to $1.20 per share in the prior year quarter.
Firm wide assets under management totaled $21.1 billion at quarter end and consisted of institutional assets of $12.2 billion or 58% of the total. Private wealth assets of $5.3 billion or 25% of the total and mutual fund assets of $3.6 billion or 17% of the total. Our assets experienced market appreciation of $410 million for the quarter partially offset by net outflows of  [ph] million.
Our financial business continues to be very solid with cash and investment quarter end totaling $71.2 million and a debt-free balance sheet. Our Board of Directors approved a quarterly cash dividend of $0.50 per share from July 1, 2016, to stockholders of record on June, 10, 2016. This represents an annualized dividend yield of 3.8% at yesterday's closing price.
We encourage you to review the presentation we posted on our website reflecting first quarter highlight, as well as longer-term trends and the growth of our assets under management, revenues, earnings and dividends.
I will now turn the call back over to Brian to conclude.
Thanks, Tiffany. We'd happy to take anybody's questions, if you have questions.
[Operator Instructions] And our first question comes from the line of John Fox with Fenimore Asset Management. Your line is now open.
Okay, thank you. Hello, everyone. A few questions, I think for Tiffany, well, actually for both of you, the technology expense, why do you consider that to be one-time?
There were implementation costs to move up to the cloud so that there won't be a recurring cost, so will have some recurring cost relating to licensing fees.
Okay. And should I assume that's in the information technology line?
Okay, great. And can you talk about, I don't remember you're buying the stock back before although you may have, can you talk about the decision to buying the stock in the amount than what you paid?
We bought that 93,000 shares, for an aggregate price of $4.4 million and that was basically average price of $47.41.
Right, I guess, that I can see in the release, I'm just - why did you purchase the stock, what was the thinking around that for capital allocation?
Well we did an authorization to buyback up to $10 million worth of stock.
Back in 2012
2012. And when the markets sold off, we've probably got down to levels that were really unreasonable and we made a decision to buyback.
Okay. Great. And could you talk about the decline in the investments, which I think was $72 million at the end of the year, and $45 million today, and I saw on the cash flow, you did sell some, but were there any your investment losses or anything else unusual going on there?
No, nothing unusual going on there. If you remember from a timing perspective, first quarter is when we pay out our incentive comp bonus, so you've got that money going out. So that’s the biggest piece of it. There is a little bit of a things when we move to a neutral system where our receivables were built by about $5 million, about to see a one quarter type things, so that’s really just timing.
Okay great. Thank you.
All right, thanks for your question.
And our next question comes from the line of Mac Sykes with Gabelli & Company. Your line is now open.
Hi, Tiffany and Brian. Thanks for taking my question. My first is on the DOL changes there, does that impact your Trust business at all, or do you see that affecting it at all?
Yes. I think when the rules are more explicit, we will have to comply with those rules as to how it will affect us. I don’t think it will affect us as negatively as it would affect others. We already use outside sub-advisors for a number of the asset classes that we don't offer here. So we are set up very well to deal with it.
Could you be provide an update in your relationship with Russell? I think you've been working with them, just how long you have that track record with them and what's the opportunity there?
Sure. Well, the Russell organization hired us in 2012 I believe or could have been early '13 to manage a couple of their UCITS funds and commingled funds within their trust company. And they funded us in an emerging markets SMid product that will be coming up on a 3 year record. And that record, I think, will be pretty good.
So we are excited about that. And in fact in the first quarter the SMid product was top decile relative to peers, but there are not a tons of peers in SMid. But it’s after a great start and we are excited about it.
And so, my last question is given the turnaround we've seen, March, April now, just in terms of the leverage on your platform, if we continue sort of a more positive trend for rest of the year, where could we expect perhaps the best growth in terms of your products?
Well, I mean, I think we had - if we look at emerging markets that we were just talking about that. If you look at our performance, we had liked our performance a year before last, we didn’t have a great year last year. We've had a great first quarter, had a good April.
If we can continue to deliver a good year for emerging market, we will have a three-year number, that’s pretty terrific. We still have capacity in the product and I think you’ll see - we have a potential for a large growth there.
As I mentioned in my prepared comments, we’ve seen some success in SmallCap. As we all know there is a lot of SmallCap Manager's to choose from so it has been more difficult than I would have ever thought, given the track record that we’ve put together for us to bring an asset.
But we've had some success lately and I’d expect if history repeats itself, then that will snowball and we will continue to have success in gathering SmallCap assets.
Income opportunity, it remains a- it’s a multi strategy asset class type of fund. We are on airplanes doing finals for that product. The fund itself is doing great as I said in the first quarter it was surprising after having delivered a positive return with low volatility that we saw out close in the mutual fund.
If history repeats itself, usually some of that will reverse itself because there is still a desire by the investing public to have somebody else make the decision on what asset classes to be in.
And if the objective is to deliver yield and low volatility, there is a lot of appeal to that type of product.
And as I mentioned with our low equity strategy that we started in the first quarter, that too we think will be a nice compliment to that type of products.
Thank you. That's all for me.
Thanks for your questions Mac. Operator, do we have any questions?
[Operator Instructions] And I'm not showing any further question at this time. I’d now like to turn the call back over to Mr. Brian Casey.
Okay, thank you. And we appreciate everybody's time. If you have any questions feel free to call myself or Tiffany or visit our website at westwoodgroup.com. Thanks for being a shareholder and we appreciate your time.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. You may now disconnect. Everyone have a great day.
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